In this issue of our series on Matrix Accounting we look at how do we account for contingencies when they are range bound.
Typically all GAAP’s on contingencies zero in on two conditions to accrue estimated losses on contingent eventsa) information available prior to the issuance of financial statements indicate that it is probable that an asset has been impaired and a liability has been incurred.b) the amount of loss can be reasonably estimated.
Assuming criteria (a) is met, and criteria (b) too, but the loss which is to be estimated lies within a range, instead of single loss estimation. For example, you have been handed over the list of legal cases pending against the Company by your legal team at quarter close. For a particular litigation, the legal team feels that loss is not determinable, but offer you a range. They say that the loss estimate on the basis of the current situation could be anywhere within Rs. 10 crores to Rs. 50 crores.So what do you do, consult your auditor, nah…. you are afraid that he will say accrue Rs. 50 crores. Average the loss and settle to accrue at 30 crores, or do you just ignore it and disclose the entire amount in the notes to accounts.
Since there is no illustration of the same under Indian GAAP, SOF got the answer in a pronouncement issued way back in 1976 – FIN 14 under USGAAP. The pronouncement requires you to accrue for the lower amount of the range and disclose the balance under contingencies. So in the above example, we will accrue Rs. 10 crores and disclose Rs. 40 crores in the notes together with a brief explanation to the case and its treatment in the financial statements.
So now that you have figured the treatment, do you think it will pass by your auditors. Surprisingly, when I checked this with my auditor (BIG 4) , he gave a sheepish smile and said, our auditing methodology (replicated from the
(the above illustration is an opinion, pls consult your technical team before applying the accounting for any estimated losses)
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